Growing up in a small business environment, watching your parents work harder and harder to make a good life for us as children I believe that my parents probably worked too hard and didn’t give themselves the opportunity to maximize the value of their businesses before retiring.

Succession planning should start earlier, not at age 65 when people retire, but several years before in order to determine an exit strategy which either passes along the family business to the siblings or to get the businesses ready for sale.  In Canada according to a CFIB (Canadian Federation of Independent Business) 70% of small businesses owners will retire in the next 5 years.  That provides 2 business scenarios for small business owners, one, that the businesses will be hopefully passed along to one of their siblings in order to quickly deal with the succession planning issue or two, that there will be a lot of small businesses coming up for sale.

But I believe that one of the biggest hurdles to succession planning is that small business owners who have had businesses for a long period of time actually think of their businesses as being part of the family like another child and there’s the emotional tug of war on deciding to give up the business even to their children if that’s the route they choose.  The more difficult decision is to decide to sell the business to an outsider and that’s probably one of the biggest reasons why people outside the business might view it as procrastination, but to the small business owner it could be more an emotional factor.  My parents were already past retirement age when they decided to sell some of their businesses and hang onto a few others.

This delay hurts both the employees of those businesses as well as the owners in that their is a definite lack of plan of going forward and the owner’s passion has already waned and they’re no longer really interested in running their businesses, but don’t want to necessarily letting go.

These businesses have been profitable but the owners’ have had a hard time taking time away from the day to day running of the business, or taking a step back to look at their business at the 10,000 foot level and trying to setup their business to become saleable at the most attractive price.

A study released late last year by business transition specialists ROCG Americas found only one in 10 owners received a price for their business near what they wanted or expected. The primary reason given was improper or lack of planning.

ROCG conducted the survey in North America and found that businesses with revenues between $1 and 100 million said that they were either too busy to plan for a business sale or it was too early to start thinking about it, even though 84% of them said it was important to their retirement plans.

“Many business owners are not aware of the complexity involved in the succession planning process, particularly in executing a divestiture transaction,” says Michele Middlemore, vice-president of Aon Corp.’s M&A Transaction Advisory Group. “Almost always, they underestimate the time and work and difficulty involved in getting something like that done. More often than not, they tend to postpone dealing with it and are not prepared adequately when the time is upon them.”

Businesses should be planning 2 or 3 years in advance for the divestiture.

One of the big ideas to put in place is the movement of the value of the business is from the business owner to that of the business itself.   Since small business owners are generally the drivers of the business, it’s usually been in the sales and marketing roles and this is one of the areas which has to be transitioned over to the company.  This is easier said than done, in that one quite often that there isn’t the bench strength to take over and this has to be brought into the company.  Their might be changes in technology which might be needed to brought into the company as well to allow to compete better.

One can look at the succession planning in a way is like embarking on a new business plan and here a corporate financial advisor can help with getting an independent valuation of a business to let owners know where the strengths and weaknesses lie and what to expect as a potential starting point for a dollar value of a business sale.

According to the Business Development Bank of Canada, business succession is a process that requires thought, planning and time to arrange and execute: “Whatever your definition of success, making the commitment to let go of the business and place it in the hands of someone else is perhaps the critical factor that ensures your business transition goes smoothly and profitably,” the bank notes.

Just remember though that succession planning shouldn’t be determined by what the economy is doing or the stock markets, but by personal circumstance, if you’re ready to retire, then you should be planning for it in advance by 2 to 3 years.  The process is a complex one and is similar to building a new business plan, except that you’re trying to help build for the next set of owners’ to succeed and by doing so you and your family will get top dollar for your business you have built over the years.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

In the sale or purchase of a private company its still necessary to use best practices in order to have the parties feel good about the transaction.  Using the services of a corporate financial advisor, a tax accountant, a corporate lawyer who work together as a team from the beginning will provide you with the ability to see things that are often overlooked by purchaser in a company.

In a past transaction the sole shareholder(owner) of a private company sold his shares to an independent purchaser and the capital gain realized was eligible for the small business corporation shares capital gains deduction.  So far so good for both parties.

However, one of the most common issues which is misunderstood by both the purchase & seller is the “Due to/from shareholder” account.  On the surface it seems like a fairly straight forward liability account, the credit balance in the account is owed to the shareholder.  Here is where the 3 professional advisors, a corporate finance lawyer, the tax accountant, and the corporate financial advisor know that this is a liability like any other liability and is owed to the shareholder.  Some accountants have trouble understanding this because they assume that the company had sold its shares, but the shares are separate from its liabilities.

Another effect of this “credit balance” in the Due to Shareholder account is when the new owner decides to draw money out of this account he will have been deemed to have received a “taxable benefit” under Section 15 of the Income Tax Act. Why? The withdrawal transaction isn’t a return of capital it’s a debt owed to its the former owner.  The capital gain for the seller of the business in this situation is also overstated which the capital gains exemption the owner has here.

An example might help here: the seller of the business sells her business for $500,000 and the owner has a credit balance of $150,000 in the Due to Shareholder account.  In the sales agreement the buyer of the business should ensure that the agreement reflects an allocation of the purchase price of $150,000 to purchasing the debt of the Due to shareholder account and the remainder allocated to the purchase of the seller’s shares.  The reason is that the purchaser has a debt owed by the company to herself and when she wants to withdraw some of it, it will be tax free unlike the prior situation.

This unfortunate situation can be reversed, but if the parties use best practices and have a coordinated team of advisors working from the beginning  it will save time and money for both the buyer and the seller.  But sometimes, the transaction go through due to no advice for either party and the consequences are a tax project case resulting in more money spent on a tax advisor later.  In a case documented in CMA magazine an accountant figured they fixed this by exchanging the debt for more shares, but caused more tax problems in the allowable business investment loss  issues and failed to take into account subsection 80(2) of the income tax act which allows the debt to be settled for the fair market values of shares issued.

The lesson here is that it is easier to have a team in place before you decide to do a sale or purchase of a private business to advise you on the issues, because they’re not as straight forward as you may think.  You can’t substitute the expertise of a group of advisors to help you save you money and headaches in the long run.

Written by Richard Wong, CMA      rwong@firstchoicecapital.ca

Part 2:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.

The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years.  This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.

BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world.    The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) .  This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.

What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional  Health Research) and tax incentives.

Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.

SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding.  It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug.  A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases  since 1995.

Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.

Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget.   Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.

The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people.  The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Part 1:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

Canadian government’s announcement on reduction of future funding for Genome Canada affects life sciences companies in British Columbia, including larger start ups such as Xenon Pharmaceuticals.

Affects of this including having fewer jobs and hindering the ability of companies to commercialize their intellectual property they have created in Canada because of the cost to do this, hence the need for Canadian life sciences companies needing to partner up with large American and European pharmaceutical companies in order to get these discoveries to market.

For start-up companies Genome Canada has provided bio-tech companies with the ability to do research and keep our science graduates from our universities to bolt to the United States & Europe with the so called brain drain.

A current Xenon Genome BC project has 10 to 15 scientists working on the project currently, which if Genome Canada funding wasn’t available, these high paying jobs would not exist in British Columbia.

Because Canada has such a tiny venture capital pool for life sciences,  life sciences funding is largely dependent on foreign venture capital funding as the primary source of funding as well as Canadian federal and provincial funding.

While in the United States the National Health Institute (NIH) funding will be increasing by $3 billion announced by President Obama whereas the funding from the Canadian government has decreased.  The government is doing exactly the opposite and sending a statement on the importance or lack of it on science and technology in British Columbia.

President Obama has announced already funding for green energy grids, health and innovation, whereas in Canada we are still focused on the old school infrastructure is an opinion in the life sciences community.

Simon Pimstone commented that if you’re putting money into infrastructure which will build a knowledge based economy, such as technology parks for Pharma companies.  Companies like GlaxoSmithKline or Johnson & Johnson will be enticed to build manufacturing vaccine facilities which provides high paying opportunities for science students for years to come.

Continued in Part 2 of Interview with President & CEO Simon Pimstone

The economy has caused a credit crunch for businesses large and small so the one thing that all businesses should do is to get cozier with your banker.  This can take the form of calling more often, visiting, inviting your account manager to your business premises, anything which will provide more real world contact with your banker.

The one thing that is definite right now and that account managers are under more pressure to ensure their clients are worthy credit risks and are up to date in their monthly bank reports.   So now more than ever, its important to better your relationship with your banker, even if you don’t need more financing at this time, but very important if you think you may need to re-finance,  get waivers, or get amendments to their current financing.

Banks through their own databases, but also through credit bureaus have statistics on every industry and if you’re an underperforming company compared to the average in your industry, you may have already gotten a call to ask you whether you really do need for example a $4 million credit line, when you’ve only used $1 million for the past 3 years, yet your debt to equity ratio is higher than the industry average.  Not a good sign, but manageable if you take the time to provide comfort to your banker.

It’s hard to think of your banker as a partner, but they really are, they want to see you succeed, not fail, so having them understand your business and your competitive advantage compared to your competition is very much smart business.  So here are some steps to take to improve your banking relationship:

1. Make Verbal Contact with Your Banker
   - Call your account/relationship manager at least once a month or even better twice.
   - If your company isn’t doing well it’s even more important to outline your strategy to your banker to improve and give them comfort in what’s your business direction.
2. Build Trust with Your Banker
   - Private companies have quite often reported the bare minimum information to their banks, because they have wanted to remain private in all respects.  In today’s economy, in order to get help either re-financing or potentially finance acquisitions its time to bring down the curtains and let the bank see what you’re doing well.
3. Prepared Detailed Forecast Information
   -  Public companies are used to sharing information with their banks so for them this less of an issue because of the quarterly presentation done by CFO’s for their public companies, but some have gotten away from this practice in the last few years but should think about re-instituting it only for the confidence it shows to stakeholders about their business direction.
   - These forecasts should include various scenarios of financial, operational, and employee headcount variables.
   - The forecasts should include worst to best case scenarios going out at least 2 years.
4. Hire Reliable, Knowledgeable Financial Advisors
   - Today its a good practice to ensure that information is presented accurately and consistently by advisors who understand your industry, your business, and advisors who have gone through economic downturns before where maybe your current management haven’t.  In today’s times, you better know you’re making decisions on good reliable financial information.
5. Communicate, Communicate, Communicate!
   - Now is the time to be proactive, treat your banker as your partner in business, keep them informed of major milestones, and what you’re doing to beat the current economic environment.  Be a leader, manage your banker rather than have the bank manager you!

Written by Richard Wong, CMA    rwong@firstchoicecapital.ca

In today’s economy people who are looking to start businesses here all over the media that the credit crunch has hit everyone and it’s impossible to get financing. In our business we certainly see that for existing clients with large banks as their creditors it certainly is more trying in determining whether or not to cut back on costs, or deciding on going after acquisitions.

The basis for capital has always been based on “How’s your credit worthiness and what’s the Collateral.”  In Vancity’s case Community business loans are based on “Character & Business Viability.”

This major difference in helping small businesses in BC has amounted to loans of over $13 million for 800 companies.

The question is why would Canada’s largest credit union with over $14 billion in assets and over 390,000 members why would they do this, simply because by helping out small businesses establish themselves in the first 5 years they will in turn likely turn these customers into larger businesses with larger operating credit lines, create more jobs, and help the credit union grow as well.

If larger banks had a small portion of their business directed to helping smaller new businesses they maybe able to do the same, possibly, but Vancity has taken the risk and it seems to have provided a service where potential small business owners can look to for help in financing.

Written by Richard S. Wong, CMA      rwong@firstchoicecapital.ca

Facebook’s initial failed attempts to takeover Twitter were because the most common reason why mergers & acquisitions fail, VALUATION differences. This is the main reason why other mergers or acquisitions fail because of the parties not being able to agree on what each brings to the table. That’s why Facebook’s attempted acquisition of Twitter didn’t materialize this time around, but don’t be surprised if this marriage of social media companies still happens.

Simply, Facebook believed that their private company stock value was worth a higher amount than what Twitter management believed and when you’re trying to purchase another company primarily with company stock it really is a moving target because there is no real 3rd party independent opinion of what the common stock is worth, like a public company stock.

Twitter was in active talks with Facebook for a takeover based on a value which is still a moving target just like any other private company where it is hard to put a independent value on its common stock. However, Facebook for stock option purposes where employees wouldn’t be taxed had valued its common stock at $3.7 billion after Microsoft’s investment which calculating backwards had Facebook’s stock valuation approaching $15 billion, but that was in a hot stock market over a year ago.

Problem with Twitter is that Facebook offered them $500 million for the company which apparently was a good number until Facebook pegged its own company value at $8 or $9 billion making Twitter shareholders’ worth of Facebook’s company less. This is a common issue in negotiations for many private companies who are looking to sell a share of their company or their company in whole. The sellers’ valuation is commonly based on the company’s best financial year and multiplying by a number to get a sales price value, whereas a buyer usually will try to use either the company’s worst year or projections to help bring the price closer to what they want to pay.

In high growth companies like Facebook who are continually trying to organically grow and through acquisitions don’t be surprised if they come back to Twitter and give them a higher dollar amount based on dropping technology stock values and Twitter has something Facebook wants is the micro-blogging technology, but most importantly growing user base of Twitter.

Mergers & acquisitions whether its for large private company like Facebook or your small business in downtown USA or Canada still have its issues trying to come to a mutually satisfying dollar value. However, for the smaller business be expected in this selling cycle to have purchasers ask for what’s called “Earnouts” and “Vendor Take Back Financing.” Earnouts are basically bonuses for the seller if the company reaches certain targets or milestones for anything from number of subscribers to EBITDA to Net Profit. Vendor take back financing is where the seller agrees to a price and will help the purchaser by financing a portion of the sell price which helps the purchaser get outside financing. These 2 negotiation tools were widely used before the last economic boom and expect them to come back if sellers want to sell their businesses quicker in this economic environment.

Written by Richard Wong, CMA      rwong@firstchoicecapital.ca

“Sometimes we do our best, sometimes we need to do what’s required” Winston Churchill.  Those choice words really apply today, doing what’s required. We have had a great economic run these last several years and for many people doing business was more about taking sales orders and making record profits year over year.

Today though we are back to how business was before the business boom, and that is working harder to keep our clients, working harder to get new clients, keeping a watch on the bottom line, and what we have in our cash flow reserves. What we know is that companies which have good leaders ie. Sergei Brylin (Google), Steve Jobs (Apple), Chip Wilson (Lululemon), have learned to take companies and ideas from past downturn times into the present day with great vision, but even more importantly, greater execution.

Leaders, come out of economic downturns better than anyone else. Why? 5 Qualities distinguish them

1. Have a clear vision
2. Reap what you sow, sow more and you will reap more.
3. Know the difference between a problem finder & a solution provider.
4. Who do you spend the most time with? The 5 people you spend the most time with have the most profound effect on you. Your income is the average of those 5 people.
5. Get good at whatever you practice.

10 Ideas to Lead:

1. Think of loss leaders, 20% of all your customers provide 80% of your revenue, therefore you can give away more freebies to help you get more revenue from your best clients.
2. Go beyond the call of duty: Example. You need to have your shoes shined before a early morning presentation but its late at night and the hotel doesn’t have a shoe shine station or anyone who can do it. What does the hotel manager do, he gets someone before the presentation starts to shine the presenter’s shoes from outside the hotel.
3. Look within your own organization to give away something for free that doesn’t cost you anything.
4. Think about joining hands with other groups to do business with to save costs.
5. Keep staff productive ie. Bob Rennie of Rennie Marketing gives his employees Friday afternoons off because he thinks they’ll be more productive and fresh thinking because he can’t pay the same amount of bonuses this year compared to last year.
6. Think of how important your value is to of consumers and communicate it with staff and customers.
7. Shopping centers provide a great opportunity for businesses to get good value for upcoming leases.
8. Try to be a FAD (Feelings, Attitudes, Distinction) should be taken into account in your decisions of your customers.
9. Goals written increase the likelihood by 1000 times of those goals being achieved. The top 3% write goals, the top 2% write goals as if they’ve already reached the goal.
10. Continue branding and marketing

Organizations are now required to going back to doing the basics and they can endure hard times by doing what’s necessary. A Booz Allen Hamilton study on how organizations endure over time led to their findings showing that:

1. Organizations changed and grew.
2. Organizations stayed true to its founding principles

The message today is work hard, be the best that you can be, don’t take yourself or your customers for granted, and be proactive to lead your organization into the future out of this economic downturn.  Be Bold and be a leader!

Check out this  video on being bold.  http://www.odpn.ca/demand/videos